Wash sale triggered, now what?

[crazyapple11]

Hi everyone,

This is the first time I tried to do tax loss harvesting and obviously, I screwed it up. I would appreciate it if anyone can give me some help with what shall I do now.

Here are the facts. My wife and I both hold stock MO in our individual taxable accounts. We plan to sell them and buy mutual funds. So yesterday, I sold 200 shares of MO for $8,192.82 with a loss of $6,064.68. Unfortunately, my wife did not turn off her reinvestment and yesterday was MO's dividend pay date. Accordingly, on the same day, my wife automatically purchased 28.7915 shares of MO for $1197.44 at her taxable account. My questions thus are

1) how can I claim a tax loss on my 200 shares ? I read the wiki and still struggle with how to calculate it. And will Turbotax help me on doing that?

2) I have another 100 shares of MO in my taxable account. Shall I wait for 31 days now to avoid complicating the situation further ? Or it does not matter at this time and I can sell them now.

Thanks a million!

[aristotelian]

Did you sell the additional shares?

I believe the 28.8 shares would wash out the loss on 28.8 shares of the lot that you sold. You would be able to claim the loss on the rest. You would then adjust the basis of the 28.8 shares by the amount of the loss you were unable to claim. If you then sold the 28.8 shares you could claim that loss as well.

[H-Town]

Just sell all of the MO shares. Problem solved.

[livesoft]

Did you sell the additional shares?

I believe the 28.8 shares would wash out the loss on 28.8 shares of the lot that you sold. You would be able to claim the loss on the rest. You would then adjust the basis of the 28.8 shares by the amount of the loss you were unable to claim. If you then sold the 28.8 shares you could claim that loss as well.

Yes, now go collect your million.

I don't know if TurboTax will help the OP, but the IRS has instructions that will help the OP in IRS Publication 550.

[an_asker]

Just sell all of the MO shares. Problem solved.

+1, especially if you want out of it!

[crazyapple11]

Just sell all of the MO shares. Problem solved.

Thank you. hmm, how does it solve all the problems? My understanding is I still have to deal with the wash sale problem. I am already concerned about how to allocate the loss to 28 shares my wife purchased. I definite will sell all when I figure out how I can comply with the wash sale rule.

[crazyapple11]

Did you sell the additional shares?

I believe the 28.8 shares would wash out the loss on 28.8 shares of the lot that you sold. You would be able to claim the loss on the rest. You would then adjust the basis of the 28.8 shares by the amount of the loss you were unable to claim. If you then sold the 28.8 shares you could claim that loss as well.

Thank you. I have not sold the additional 100 shares because I have not figure out how to deal with the wash sale rule. so if my wife sells the 28.8 today, can we fix the problem? i.e. I claim the tax loss on my 200 shares and my wife claims gain or loss on her 28.8 shares?

[crazyapple11]

Did you sell the additional shares?

I believe the 28.8 shares would wash out the loss on 28.8 shares of the lot that you sold. You would be able to claim the loss on the rest. You would then adjust the basis of the 28.8 shares by the amount of the loss you were unable to claim. If you then sold the 28.8 shares you could claim that loss as well.

Yes, now go collect your million.

I don't know if TurboTax will help the OP, but the IRS has instructions that will help the OP in IRS Publication 550.

Thank you. Will read it.

[Sprucebark]

The basis on those 28 charges gets adjusted due to the wash sale. If you dispose of them, even within this 30 day period, you no longer own any of the underlying asset and your adjusted wash sale basis would be “disposed”.

So yes, sell those 28 shares, don’t buy any more of those shares for the next month and your problem goes away.

[Sprucebark]

And since it’s in different individual names, I don’t think the brokerage will even be able to flag it as a “wash sale”. Sell the 28 shares and move on. The only entity that is going to be able to track this wash sale is the NSA.

Now this is more of a curious theoretical question- if you had individual accounts and filed as “married filing separate” would the wash sale rules not apply if one spouse sold shares and another spouse bought identical shares at the same time?

[crazyapple11]

The basis on those 28 charges gets adjusted due to the wash sale. If you dispose of them, even within this 30 day period, you no longer own any of the underlying asset and your adjusted wash sale basis would be “disposed”.

So yes, sell those 28 shares, don’t buy any more of those shares for the next month and your problem goes away.

Thank you. Does it mean I have to sell all my MO shares immediately, not just the 28.8 shares?

[House Blend]

The basis on those 28 charges gets adjusted due to the wash sale. If you dispose of them, even within this 30 day period, you no longer own any of the underlying asset and your adjusted wash sale basis would be “disposed”.

So yes, sell those 28 shares, don’t buy any more of those shares for the next month and your problem goes away.

Thank you. Does it mean I have to sell all my MO shares immediately, not just the 28.8 shares?

1. You (or rather spouse) have purchased 28.7915 replacement shares. At this point you cannot create more wash sales by selling more shares. To create more washes, you would have to buy new shares. These would serve to replace more of the 200 shares you sold.

2. In order to claim *all* of the loss on the 200 shares, you need to sell the 28.7915 replacement shares. At this point, this is the main thing that ought to be done. If you hold onto those shares, you will be eligible to claim only the loss on the 171.2085 shares that did not get replaced.

3. I doubt that there is any tax software that can account for wash sales that involve a purchase and a sale in two different accounts. You or the tax professional you hire would have to figure this out.

4. That said, if you do sell the 28.7915 replacement shares, the net effect on your taxes is 99.99% identical [see item #5] to ignoring the wash sale and simply reporting the numbers on your two 1099's without any adjustments. So I wouldn't have a problem with not making the adjustment in this case.

5. [For tax geeks only.] The one area where there *might* be a tax discrepancy between ignoring the wash and reporting it properly is if the oldest 28.7915 shares of the 200 you sold were long term shares. To put specific numbers on this, let's say that when spouse sells the 28.7915 replacement shares, it is at a gain of $0.50/share, or $14.40. For simplicity, I'll assume *all* of your 200 shares were long term.

Your 1099-B would show a net LT loss of $6064.68.
Her 1099-B would show a net ST gain of $14.40.

If you properly adjust for the wash sale, your sale produces a claimable LT loss of $5191.62. The other $873.06 of your loss was acquired by your spouse's replacement shares, and those shares became long term once that happened. So her sale produces a net LT loss of $873.06 - $14.40 = $858.66.

Either way, the total net loss is the same, but whether it incurs the same tax costs when you file your 2020 2021 taxes depends on the ST versus LT breakdown, and that in turn depends on what else is happening on your Schedule D. In this example, not making any adjustments can only increase your tax costs, but if the replacement shares are sold at a ST loss, then it would be the opposite.

[crazyapple11]

Thank you so much! It really helps me to understand it.